Market Structures

Market Power

Market power: The influence that any particular buyer or seller can exercise over the price of the product.

Ex. These dominate in their respective markets.

Apple 80%

Coca Cola 44%

Nike 35%

Perfect Competition• Large number of firms

producing the same/identical product.

• Price is set by buyer.• Each firm’s production level

does not influence the price.

“Price Takers”

-Agriculture Ex. Strawberries, wheat,

poultry-Gold -Oil -Stock market

• Few barriers to entry.

Monopolistic Competition

Many firms compete to sell products that are similar but not identical.

Differentiated products. Slight control over price.

• Few barriers to entry

Ex. -Jeans -Sun

Glasses-Watches

OligopolyMarket dominated by a

few large profitable firms. (3-4 control 70-80%).Little or no true priceprice

competition.Firms are interdependent

Ex. -Airline Industry-Breakfast Cereal-Soft Drinks

• Significant barriers to entry (start up costs high).

How do firms in an oligopoly control their respective industries?

Predatory Pricing- selling a product below cost to drive competitors out of the market.

Illegal

Collusion- an agreement among firms to set prices. Illegal

They buy other businesses!

Conglomerate- a business combination merging more than three

businesses that make unrelated products.

How do oligopolies continue to grow legally without becoming a monopoly?

Examples

GILLETTE1. Razors/shaving accessories - #1 in U.S. - 70% market share

2. Batteries- #1 in U.S. - 50% market share

Duracell

3. Deodorant- #2 in U.S.

Right Guard

More Examples

SARA LEE

1. Baked Goods- #2 bakery in the U.S.

2. Packaged Meat- major provider to food service

Hilshire Farm, Jimmy Dean – “Go Meat!”

3. Apparel- #1 intimate wear provider in U.S.

Beefy T, Hanes, Playtex

MonopolyA market dominated by a

single seller.Barriers prevent firms

from entering the market.High prices = no

competition. Natural Monopoly: Most

efficient (lowest long-run average cost) for production in a single firm.Ex. Gas Company

Government Monopoly: patent, license, franchise.

Ex. Public Water.

Vertical MonopolyVertical Monopoly

Pepsi

Sugar

Water

Aluminum

Horizontal Monopoly

Pepsi

Coke Royal Cola Seven Up

L WIO Competition and Market Power

Price Discrimination

Price Discrimination: Dividing consumers into two or more groups and charging a different price to each groups.

-Everyone has his or her own maximum price.

-Monopolists can attract more consumers and maximize profits because they are capturing each consumers maximum price

Examples of Price Discrimination(remember consumer surplus?)

Senior Citizen DiscountKids Discount

They still take up a seat

Ladies NightCoupons/ “Kohl’s Cash”ASBCollege TuitionCan you think of others?

How to Make the Most Through Price Discrimination

Your cereal manufacturer knows that some of its customers pay lots of attention to prices, while others don't.  If it were to cut its price, then only the price-sensitive customers would respond by buying more.  The price cut would be wasted (from the firm's point of view) on those shoppers who don't pay attention to prices.   

Coupons are a clever way of giving a break just to the price-sensitive shoppers. By creating all of the hassles you described, manufacturers see to it that only very price-sensitive customers are going to end up using their coupons.  This targets the price cut on just those people who will be most responsive to it.  

The Government can Limit Market Power